Mutual Fund News

Mutual fund gets more diversified as Sebi allows mutual funds to invest in exchange traded commodity

The capital market regulator, SEBI has allowed fund houses to participate in commodity derivative markets through exchange traded commodity derivatives (ETCDs).

Unlike an ETF structure where fund houses are required to maintain physical reserve of commodity with the custodian to offer units (gold ETFs for instance), mutual funds can now take exposure to commodity markets through a futures contract. Simply put, mutual funds can invest in commodity markets through gold, silver, zinc and copper futures.

However, fund houses will have to take a long-term view because they are barred from taking short positions. For instance, if a fund manager has a bullish view on the longterm prospects of silver, the fund house can participate in it through silver futures by paying a premium. However, if a fund manager has a bearish view, he cannot participate in such contracts.

SEBI’s decision to permit mutual fund participation in the segment comes on the back of the regulator’s desire to deepen the commodity derivatives market in India. In the last two years, SEBI has permitted participation of Category III Alternative Investment Funds and allowed Eligible Foreign Entities to invest in them.

Mutual funds will be able to invest in ETCDs, subject to the following rules:

Fund houses will have to appoint a dedicated fund manager and custodian

Fund houses will have to lay down a formal investment policy and valuation policy

Mutual funds can take exposure to ETCDs in their hybrid schemes and gold ETFs

They can invest in any Indian ETCD except those which are classified as ‘Sensitive Commodities’. Sensitive commodities are agricultural commodities prone to frequent government or external interventions in terms of trade barrier or import/export restrictions. Or these are agricultural commodities that have seen frequent price manipulation in the last five years.